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How transition service agreements can help M&A deals close quickly

Mergers and Acquisitions
Mergers and Acquisitions

By Barbara Carmichael | November 23, 2021

Transition service agreements are an integral piece of any M&A deal, but they require careful preparation on both sides of a transaction.

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About the M&A transition services agreement blog series

The M&A transition services agreement (TSA) three-part blog series by Barbara Carmichael, SPHR, CMHR, explains why a TSA is important, and how to structure an effective TSA.

When M&A deals are struck, both parties typically want to close the transaction faster than the time it takes to make changes to the underlying business infrastructure. As a result, many transactions incorporate a transition services agreement (TSA) to allow the deal to proceed and close without waiting for all of the support and services the acquired business will ultimately need to continue to operate.

A TSA is a contractual agreement between the seller and buyer that details the services each party will provide to the other. Such agreements:

  1. Allow the deal to close
  2. Ensure that each party can continue to operate at close
  3. Permit appropriate time for the parties to set up the services required to operate independently

For each party to a TSA, preparation is key

Considerations for a seller

For a seller, it is critical to determine, well in advance of a deal, what support can and should be provided, for how long and at what price. It is also important to understand interdependencies between TSA items. For example, does the target need to remain on the human resources information system (HRIS) to maintain payroll under the TSA?

A seller also needs to determine if the divested business provides resources, support, processes or technology to the RemainCo. If so, the seller may need reverse TSA services. A reverse TSA allows the divested business to provide support to the seller or former parent. However, providing services to the buyer in support of a business that the seller is exiting will not always be high on the priority list of the seller, nor does it always make sense.

Nevertheless, as a seller, if you do not prepare, you may be end up with your back against the wall during the heat of an M&A negotiation. This may result in your business providing broader services or for a long duration just to get the deal done. But with planning and preparation, you will have more control and may be able to structure the deal in such a way that the TSA services will be minimized or may not be required.

Considerations for a buyer

For a buyer, especially for an acquisition where the target is being carved out of a larger organization or is receiving services from the seller or a parent company, it is critical to identify the resources, support, processes or technology that are outside the target business early in the due diligence process. This assessment allows the buyer to understand the gaps that prevent the target business from operating independently. Completing this assessment also allows the buyer to take a step back and reflect upon the strategic rationale for the deal.

After understanding what it will take to stand up or integrate this target into the buyer’s infrastructure, the buyer can assess its own “readiness to catch” the target business and determine if this deal still make sense. Once the gaps are known and it is concluded that the gaps cannot be addressed prior to close through the buyer’s own infrastructure or stand-alone services, a TSA may be in the best interest of the buyer and seller to ensure that the deal is able to close in a timely fashion.

It is important not to wait until the deal signing to do this assessment. A delay in completing this assessment could result in the loss of negotiation leverage with the seller or, worse, may delay the deal’s closing.

Final thoughts

A TSA offers both a seller and buyer the opportunity to close a deal quickly and help manage business continuity for the acquired business. The next part of the series will address how to structure a TSA, create effective TSA schedules and develop a well-built governance structure.

Author

Senior Director, Integrated and Global Solutions – Global Benefits/M&A

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